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PG&E Corp. Stays Neutral

We have maintained our Neutral recommendation of PG&E Corp. (PCG - Free Report) on Jun 24, 2013 based on the company’s supportive regulatory environment, diversification into alternative power sources and infrastructure improvement programs partially offset by soft first quarter performance, accidental charges and fluctuation in prices.

Why the Reiteration?

PG&E Corporation has a solid portfolio of regulated utility assets that offer a substantial long-term growth potential. The company operates in the regulatory progressive state of California. The California Public Utilities Commission (CPUC) provides the company with ample regulatory support through progressive mechanisms like decoupling. Decoupling protects the top line of the company against risks arising from lower customer usage, weather vagaries and volatility in prices.

PG&E Corporation strives to optimize generation margins by improving its cost-structure, performance and reliability of its nuclear as well as fossil units. Going forward, we expect the company’s earnings growth to be driven by favorable decisions from CPUC and Federal Energy Regulatory Commission. Long-term supply agreements, focus on power generation from renewable sources and modernization of infrastructure would result in rate base growth.

Moreover, the company’s strong balance sheet and cash flows provide substantial financial flexibility and cushion in the present challenging business environment. It has been consistently paying dividends and currently pays an annual dividend of $1.82 per share. This brings the average dividend yield to 4.1%.

Despite these positives, the company’s soft first quarter performance as a result of lower regulated return on equity and higher debt, the present unfavorable macro backdrop, headwinds in the California economy, tepid demand for electricity, accidental charges and power-price volatility remain matters of concern for the company.

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